Did Yahoo’s Flirtation with Google Constitute a Poison Pill?

With Saturday’s news that Microsoft is withdrawing its bid for Yahoo! — Microsoft had reportedly been willing to raise its offer for to $33 a share, or about $47.5 billion, but Yahoo demanded at least $37 a share — it appears that the four-month courtship is finally over, at least for now.

But that’s business. What happened to the deal on the legal end of things? Over at Business Associations Blog, UCLA prof Stephen Bainbridge takes a look at Yahoo’s threat to outsource search to Google, and whether the threat of a strategic partnership with Google constituted a valid poison pill under corporate law. In a letter from Microsoft CEO Steve Ballmer (pictured, left) to Yahoo CEO Jerry Yang (pictured, right) withdrawing the offer, Ballmer wrote:

such an arrangement with the dominant search provider would make an acquisition of Yahoo! undesirable to us for a number of reasons . . . . it would fundamentally undermine Yahoo!’s own strategy and long-term viability by encouraging advertisers to use Google as opposed to your Panama paid search system . . . . [and] consolidate market share with the already-dominant paid search provider in a manner that would reduce competition and choice in the marketplace.

Given Ballmer’s concerns over the prospect of a Yahoo-Google partnership, Professor Bainbridge asks how the Delaware courts would have analyzed the case if Microsoft had sued to block Yahoo from taking such a step. “Presumably Unocal would have been the standard of review. . . ,” Bainbridge writes. The Unocal decision, as all M&A junkies know, addresses the validity of defensive mechanisms, which are provisions the parties embed in a deal to keep it from falling apart. Under Unocal, if a court finds that a provision does, in fact, qualify as a “defensive mechanism,” then it applies a heightened standard of scrutiny to the deal.

So, would the strategic partnership fly under Unocal? Bainbridge says it’s not a sure thing. “Although the Delaware Supreme Court [has held] that a board need not abandon its long-term business plan just because a hostile bid has been made, it’s not at all clear to me that Yahoo’s effort to outsource search would qualify as such a plan for purposes of an Unocal analysis. Yahoo would have to show that it was a pre-existing part of a long-term strategic plan.”

LB’ers: We know there are a lot of 2L’s out there getting ready to face down their corporations exam this week and next. We also know that professors love to convert headlines into exam fact-patterns. So give us your A+ answer. And best of luck on the test!

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